Recession is coming

I’m spending the weekend in Whistler, Canada. Although it’s not a holiday weekend, the resort is still fully booked, the ski slopes are busy and people are spending money everywhere.

And yet, after 4 years of looking for signals, and ignoring the the constant predictions from the news media, I finally see signs of an impending recession.

No, it’s not the fact that inflation has started to rear its ugly head, or the threats of tariffs or the crackdown on immigration. While all these factors could individually have a negative impact on the economy, the biggest sign is the stall in the housing market.

Residential construction and home remodeling sector is a significant 4% of the US economy. Its health offers valuable insights into broader economic trends.

Currently, we’re seeing a concerning decline in homes sales and home remodeling spending, approaching levels reminiscent of the 2009 financial crisis.

Imagine the impact in cities where housing costs are already sky-high. In these areas, the construction and remodeling industry is a major economic driver. A slowdown here means job losses, reduced local spending, and a cascading effect on related businesses.

This isn’t just about bricks and mortar; it’s about livelihoods and community stability. The current trend serves as a strong warning sign, suggesting a potential economic downturn that could have far-reaching consequences.

In other words, recession is coming.

For investors, this translates to heightened risk in related industries and a potential dampening effect on consumer spending.Consumer confidence is already declining. It’s down 10% in the past month and 16% in the past year. And when consumer confidence declines, it often leads to lower consumer spending.

When consumer spending declines, business spending and ad spend also declines.

The largest tech companies (the magnificent 7) are highly dependent on business and ad spend. They are over represented in the SP500 – a widely used proxy for the stock market – consisting of roughly 30% of the index.In growth funds, these seven stocks are held in an even higher concentration, as much as 50% or even 75%.

While high-growth tech stocks may have delivered impressive returns in recent years, the current economic climate suggests a potential shift towards greater volatility and increased downside risk.

These stocks are also considerably more overvalued compared to the rest of the stock market, and face a more drastic decline in price.

In fact, this year they have underperformed, especially against international stocks which have finally started to show some signs of life.

In light of these emerging headwinds, particularly within a sector sensitive to interest rate fluctuations and consumer confidence, a prudent approach is warranted.

But not too worry, a good defense is a well diversified portfolio with uncorrelated asset classes. And a focus on stable, established companies with strong fundamentals is crucial in navigating this period of uncertainty.

The housing sector’s decline serves as an early warning, and that a proactive, risk-aware strategy is essential.This is the time to be cautious and look at a defensive strategy.

In client portfolios, I will be slightly lowering our exposure to US public equities, replacing them with private infrastructure companies.

The US needs $1-2 trillion of spend to update our roads, bridges, ports, airports, communications and electrical infrastructure over the decade. A lot of these companies are private, and are trading at cheap valuations.

If not a client and you have one of these situations:

* over-concentrated in high-growth stocks

* have more than 25% of your networth in one stock

* are 5 years from retirement, or

* just generally worried about your financial future

Let’s discuss how these trends may impact your portfolio and explore strategies to mitigate potential risks.

So, as always, keep calm and invest!

Regards,

Nirav